Contents. * DRUM Income Plus Reit PLC. Front cover: 3 Lochside Place, Edinburgh

Transcription

1 DRUM INCOME PLUS REIT PLC REPORT & FINANCIAL STATEMENTS FOR THE PERIOD TO 30 SEPTEMBER 2016

2 Contents STRATEGIC REPORT DRIP REIT* Highlights 2-3 Our Portfolio 4-5 Chairman s Statement 6-8 Building for Growth 9 Timeline Investment Adviser s Report Principal Risks and Uncertainties CORPORATE GOVERNANCE Board of Directors 26 Corporate Governance Statement Directors Report Statement of Directors Responsibilities Report of the Audit Committee Directors Remuneration Report FINANCIAL STATEMENTS Independent Auditor s Report Consolidated Statements Notes to the Consolidated Financial Statements Company Statements Notes to the Company Financial Statements Shareholder Information Glossary Corporate Information 86 * DRUM Income Plus Reit PLC. Front cover: 3 Lochside Place, Edinburgh

3 DRIP REIT Highlights RAPID PORTFOLIO GROWTH OF ASSETS REGIONAL, SMALLER SIZED LOTS 9 DIVERSIFICATION NUMBER OF TENANTS LTV % OCCUPANCY RATE 96.9% AS AT END OF SEPTEMBER 2016 AS AT END OF SEPTEMBER 2016 AS AT END OF SEPTEMBER 2016 ANNUAL RENT ROLL 4.14M AS AT END OF SEPTEMBER 2016 WAULT 5.90 YEARS AS AT END OF SEPTEMBER 2016 COMPREHENSIVE REVENUE PROFIT 1.9M FOR THE PERIOD CURRENT YIELD GROSS CONTRACTED RENT 7.8% AS AT END OF SEPTEMBER 2016 NET DIVIDEND YIELD 5.05% AS AT END OF SEPTEMBER 2016 COMPREHENSIVE CAPITAL LOSS 2.0M FOR THE PERIOD NAV PER SHARE 93.5p AS AT END OF SEPTEMBER 2016 EQUITY SHAREHOLDERS FUNDS 34.2M AS AT END OF SEPTEMBER 2016 PROPERTY VALUATION GAIN* 1.0M FOR THE PERIOD DOLOR PULVINAR ALIQUET GOSFORTH SHOPPING CENTRE: GOSFORTH ARTHUR HOUSE: MANCHESTER MAYFLOWER HOUSE: GATESHEAD BACKGROUND PHOTOGRAPH, LAKESIDE 5500, CHEADLE ROYAL BUSINESS PARK: MANCHESTER * After capital property acquisition costs of 2.9m are stripped out. 2 3

4 Our Portfolio Since launch in May 2015, DRIP REIT, by following its differentiated investment strategy, has assembled a portfolio of regional smaller sized lots, providing attractive income yields with the potential to add value through active asset management. DULOCH PARK TURNSTONE ROAD DUNFERMLINE Valuation: 4.8m Acquisition yield: 7.4% Strong WAULT and further residential development planned KEY TENANTS: BURNSIDE INDUSTRIAL PARK ABERDEEN Valuation: 2.6m Acquisition yield: 10.6% Popular industrial estate near Aberdeen Airport offering high occupancy levels KEY TENANTS: MONTEITH HOUSE 11 GEORGE SQUARE, GLASGOW Valuation: 6.0m Acquisition yield: 7.6% Low rents and strong occupational demand KEY TENANTS: 3 LOCHSIDE WAY EDINBURGH PARK, EDINBURGH Valuation: 4.5m Acquisition yield: 8.4% Located on Central Scotland s premier business park, strong tenant line up, asset management opportunities. KEY TENANTS: LAKESIDE 5500 CHEADLE ROYAL BUSINESS PARK MANCHESTER Valuation: 5.3m Acquisition yield: 6.7% Excellent location, modern space, strong tenant retention KEY TENANTS: GOSFORTH SHOPPING CENTRE HIGH STREET, NEWCASTLE UPON TYNE Valuation: 12.7m Acquisition yield: 7.5% Sainsbury c.40% of income with RPI uplifts for 17 years unexpired term KEY TENANTS: ARTHUR HOUSE CHARLTON STREET PICCADILLY, MANCHESTER Valuation: 4.4m Acquisition yield: 4.9% Exceptional city centre location, low rents and asset management opportunities KEY TENANTS: 23 PROFESSIONAL SERVICES FIRMS MAYFLOWER HOUSE FIFTH AVENUE BUSINESS PARK GATESHEAD Valuation: 2.6m Acquisition yield: 9.3% Low rents, strong WAULT and low capital rate psqft KEY TENANTS: 108 EASTERN AVENUE RETAIL PARK Valuation: 5.3m Acquisition yield: 8.4% Fully let with strong WAULT and tenant line-up KEY TENANTS: GLOUCESTER Valuations as at 30/9/16 4 5

5 Chairman s Statement INTRODUCTION Drum Income Plus REIT plc was established to provide investors with a regular dividend income, plus the prospect of income and capital growth over the longer term, by investing in regional real estate assets. These Financial Statements cover the 18 month accounting period ended 30 September 2016 and include 16 months of activity following the IPO completed on 29 May The first property acquisition was completed in August NET ASSET VALUE* The Group s net asset value (NAV) as at 30 September 2016 was 93.5 pence per share. The significant factors determining the return over this first period have been the costs incurred in respect of the launch (2.3 pence per share) and of purchasing the properties identified by the manager (8.6 pence per share). These costs have been mitigated by the success of the active management initiatives implemented by your Investment Adviser which have contributed to an increase in the valuation of the properties purchased, excluding capitalised costs, equivalent to 2.8 pence per share. This means that while the Group s total comprehensive loss for the period was 66,000, when the capital property acquisition costs of 2.9 million are stripped out a gain of 1.0 million was made on the property purchase price. As at 30 September 2016 the share price was 104 pence, an increase of JOHN EVANS, CHAIRMAN 4% from the 100 pence at launch. 30 September 2017 and at least 6.0 The share price stands at 102 pence pence per share in respect of the year as I write, representing a premium of ending 30 September % to the 31 December 2016 NAV of 95.5 pence. INVESTMENT ACTIVITY During the sixteen month trading DIVIDENDS AND EARNINGS period under review the Group The Company has declared four acquired nine properties with a value interim dividends of pence at 30 September 2016 of 48.2m. per share in respect of the period since launch. The dividends paid The properties are in various regional during the quarters to 31 March, 30 locations and have in total 83 June and 30 September 2016 tenants; as stated in the prospectuses were fully covered by the Group s the Company has no exposure to earnings per share for the sixteen Central London markets which month trading period of 6.47 might be more exposed to pence and the Board is targeting fully political uncertainties. covered aggregate quarterly dividends of at least 5.5 pence per Further details on the property share in respect of the year ending portfolio and activity are given in the Investment Adviser s Report on pages 12 to 23, together with a description of some of the active asset management initiatives that have added value for the Company shareholders. The Board is delighted that the whole of the proceeds of the initial and subsequent issues have been invested at valuations and yields very much in line with those described in the prospectuses. FUND RAISING The Company published a prospectus in February 2016 relating to an initial placing and subsequent 12 month placing programme. It issued 2.8 million shares in March 2016 and 2.0 million shares in August 2016, 0.4 million of them under the placing programme, all at a price of 1.00 per share. The placing programme provides a flexible and cost effective mechanism for issuing further shares to meet investor demand and take advantage of new investment opportunities. GEARING The Board stated in the prospectuses that it intended to target initial gearing, calculated as borrowings as a percentage of the Group s gross assets, of 40% and this remains the case. At 30 September 2016 the Group had in place a 20 million revolving credit facility with the Royal Bank of Scotland plc, due to expire in July 2017, of which it had drawn down 14.5 million, representing a gearing percentage of 29.8%. On 6 January 2017, the Group replaced this facility with a new 25 million 3 year revolving credit facility agreement also with the Royal Bank of Scotland. OUTLOOK The Board believes that the outlook for the regional property market in the UK remains strong, underpinned by high levels of occupational demand and a shortage of supply. The Investment Adviser s knowledge and experience will be key in continuing to identify and effectively 6 7

6 Chairman s Statement Building for Growth Driving income and capital growth through active asset management is the key objective of the Investment Adviser s approach for DRIP REIT. The Investment Adviser focuses on a distinct set of criteria when identifying the right property, at the right time: 1 SMALLER LOT SIZES Between 2m and 15m 2 HIGHER YIELDS Target Property Yield of at least 7.5% ALAN ROBERTSON (DIRECTOR), JOHN EVANS (CHAIRMAN) AND HUGH LITTLE (DIRECTOR/CHAIR OF AUDIT COMMITTEE) 3 SOLID COVENANTS Blue chip rent roll including FTSE 100 and FTSE 250 constituents manage properties in this sector. The Group will continue to focus on its differentiated investment strategy of investing in multi-let assets in regional locations with a value of between 2m and 15m. The positive yield differential that these assets enjoy over larger and more London and South East located assets persists and the Board looks forward to further progress being made. John Evans Chairman 26 January PRIME LOCATIONS Good transport links; high pedestrian traffic 5 ASSET MANAGEMENT OPPORTUNITIES Driving growth via active management * The pence per share numbers in this paragraph are calculated on the basis of the number of shares in issue (launch costs) or the weighted average number of shares in issue as appropriate. 8 9

7 Timeline IPO and initial fund raise of 32m Acquisition of Duloch Retail Park, Dunfermline ( 4.5m) Acquisition of Monteith House, George Square, Glasgow ( 5.8m) Initial Drawdown of Revolving Credit Facility Acquisition of Arthur House, Manchester ( 4.4m) 12 month placing programme announced and 2.8m equity raised 2.0m equity raised MAY 2015 SEPTEMBER 2015 NOVEMBER 2015 JANUARY 2016 FEBRUARY 2016 MARCH 2016 AUGUST 2016 AUGUST 2015 OCTOBER 2015 JANUARY JULY 2016 AUGUST 2016 Acquisition of 3 Lochside Way, Edinburgh ( 4.5m) Acquisition of Burnside Aberdeen ( 2.6m) IPO and initial fund raise of 32m IPO and initial fund raise of 32m Acquisition of Mayflower House Office Complex, Gateshead ( 2.6m) FEBRUARY 2016 Acquisition of Gosforth Shopping Centre, Gosforth ( 12.2m) Acquisition of Lakeside 5500, Cheadle, Manchester ( 5.4m) Acquisition of Eastern Avenue Retail Park, Gloucester. ( 5.3m) 11

8 Investment Adviser s Report Drum Income Plus REIT plc ( DRIP or the Group ) is a UK real estate investment trust ( REIT ) which listed on the main market of the London Stock Exchange on 29 May 2015 ( Admission ). Its portfolio comprises nine properties predominantly let to institutional grade tenants on long leases throughout the UK and is characterised by smaller lot sizes. The Group offers investors the opportunity to access a diversified portfolio of UK commercial real estate through a closed-ended fund. By targeting smaller lot size properties, the Group intends to provide investors with an attractive level of income and the potential for income and capital growth. The Group pays quarterly dividends, now fully covered on a quarterby-quarter basis, equating to an annualised dividend yeild of 5.05% at 30 September Despite the Company s rapid growth, Drum Real Estate Investment Management limited ( DREIM ) have sought to minimise the impact of cash drag following the issue of new shares by taking advantage of the flexibility offered by the Group s 20m revolving credit facility ( RCF ). The flexibility of the RCF, coupled with proactive asset management by the Investment Adviser and the rapid deployment of cash as it has been raised, allowed DRIP to increase its targeted annualised dividend from 5.0 pence per share indicated in the initial prospectus to 5.25 pence per share. BRYAN SHERRIFF, MANAGING DIRECTOR, DREIM DRIP was listed in May 2015, with DRIP is now firmly established as one zero assets and 32 million of cash of the UK s leading REITs focussed on following the initial placing. At 30 regional UK commercial property September 2016, 16 months later, with a well-balanced geographical DRIP now has 9 assets across major spread of assets across the UK. The Commercial sectors with a rent roll Group owns over 280,000 sq ft of of 4.14m and a gross asset value of income producing assets and is 48.2m with a further 5m yet to well placed to benefit from the ever be deployed. evolving dynamics of the regional property market. DRIP continues to target smaller lot size properties in strong, regional markets where there is less competition from institutional buyers. The successful deployment of new monies on the acquisition of high quality assets at an average NIY of 7.8% during the period from launch highlights the success of this strategy. The Company imposes its differentiated investment strategy across the portfolio:- Target lot sizes of 2m - 15m in regional locations Sector agnostic opportunity driven Entrepreneurial asset management Risk-controlled development 5.05% dividend yield on 30 September 2016 share price Dividend paid quarterly Fully covered dividend policy growing incrementally I believe smaller lot size regional property remains good value, with an increasing supply of opportunities coming from institutional vendors and a strong occupational market set to drive rental growth. By exploiting these opportunities we intend to enhance income returns to shareholders and offer more stable total returns in an uncertain environment. BRYAN SHERRIFF Managing Director, DREIM INVESTMENT ADVISER - ETHOS 12 13

9 Investment Adviser s Report ANNUAL RENT ROLL BY TENANT LEASE INCOME EXPIRY PROFILE (INCL. BREAKS) 4.14m SHAREHOLDER SUPPORT of competitively priced facilities to support our investment strategies. The Group invests significantly in the portfolio which both attracts new and TENANT PROPERTY GROSS RENT TOTAL Sainsbury s Gosforth 386, % Staples UK Ltd Gloucester 315, % Agilent Technologies LDA UK Ltd Cheadle 299, % Scottish Network & Tourist Board Monteith 235, % Worldpay Ltd Gateshead 158, % Micron Europe Ltd Cheadle 153, % SKF (UK) Ltd Burnside 144, % Skills Development Scotland Monteith 126, % LS Buchanan Monteith 104, % Maplin Electronics Ltd Gloucester 86, % Remaining Portfolio 2,128, % TOTAL 4,137, % A key highlight this period was the continuing strong support from both our equity and debt stakeholders. In the Equity Capital Markets, we undertook two successful fundraisings, raising a total of 4.7 million from new and existing shareholders. The new equity was rapidly deployed through strategic acquisitions which increased both assets under management and the market capitalisation of the Group. The Group prides itself on the highly efficient use of its balance sheet to maximise income, and minimise cash drag, for our shareholders through rapid deployment of capital and this period was no different. Nevertheless, we retain a prudent approach as evidenced by our low Balance Sheet gearing of just 29.8% at 30 September ACTIVE ASSET MANAGEMENT DRIP s portfolio was established through acquisitions and the Group s core strategy of active asset retains existing high quality occupiers, evidenced through our sustained high occupancy of greater than 95%. DREIM believe our business model and team set us apart through our ability to unlock and generate enhanced value to deliver long-term capital and income returns to shareholders. We have grown a team of highly focused, experienced and talented individuals, who are passionate property experts, understand their market intimately and are committed Our debt providers continued to be management to drive income returns to delivering value to shareholders. supportive and the Group continues apace. was successful in raising 20 million 14 15

10 Investment Adviser s Report GEOGRAPHIC CONCENTRATION BY VALUE AT SEPTEMBER 2016 SECTOR CONCENTRATION BY VALUE AT SEPTEMBER 2016 North East Scotland North West South West TOTAL 15.4M 17.8M 9.7M 5.3M 48.2M Offices Shopping Centres Retail Industrial TOTAL 22.8M 12.7M 10.1M 2.6M 48.2M INNOVATIVE INVESTMENT We continue to invest strategically into our portfolio. A physical change drives a clear perception change in our assets which helps to facilitate corresponding investment from our customers and fellow stakeholders, as well as helping to attract new occupiers to the asset. GENERATING A HIGH, SUSTAINABLE INCOME DREIM believe the outlook is positive for regional commercial property with limited supply of new space and favourable demand conditions that play into DRIP s differentiated Investment business model. Our national platform provides significant leverage and efficiencies across the portfolio together with properties with low affordable portfolio rents offering growth prospects and embedded asset management opportunities. We continue to follow the Group s strategy of investing in properties with low, affordable rents. STRONG PLATFORM FOR FUTURE GROWTH Success was achieved as a result of the drive, expertise and passion of the DRIP team along with its key advisers, together with the support of our shareholders and lenders. We have created a strong platform for future growth and demonstrated the scalability of the business model

11 Investment Adviser s Report STOCK SELECTION To assist our decision making, we conduct detailed research on demographic profiles of the consumer and tenant base. We take great care to analyse spend patterns and the provision of commercial space in the catchment area and constantly monitor potential threats from competing developments or extensions and changing demographics. We also undertake credit checks on major tenants and review the supply/demand profile for each particular opportunity. We have been through an intensive period of activity for the business, swiftly and effectively deploying the proceeds from the initial equity raise plus two further equity raises into strategic acquisitions and growing the portfolio to 9 assets. A strong start to 2015 was halted as the UK General Election approached in May and subsequently dampened activity. We went on to see a high degree of re-trade stock and over ambitious pricing, along with the uncertainties occasioned by the Brexit referendum. Demand remains resilient for high quality prime assets but investors are increasingly stock selective. MAYFLOWER HOUSE GATESHEAD Acquired in August 2015 for a consideration of million reflecting an attractive net initial yield of 9.25% and an equivalent yield of 8.23%. The acquisition presents an opportunity to generate value through re-gearing the tenant leases and carrying out rent reviews from the currently very low base rents. Acquisition Price 2.6m Net Initial Yield at Acquisition 9.25% Equivalent Yield at Acquisition 8.23% Occupancy at % WAULT (including breaks) at years MONTEITH HOUSE GLASGOW Acquired in November 2015 for a consideration of 5.75 million reflecting an attractive net initial yield of 7.6% and an equivalent yield of 6.87%. The acquisition presents an opportunity to generate value through re-gearing the tenant leases and also considering the potential for change of use from office to retail on the ground and first floors. Acquisition Price 5.8m Net Initial Yield at Acquisition 7.60% Equivalent Yield at Acquisition 6.87% Occupancy at % WAULT (including breaks) at years OFFICE INDUSTRIAL RETAIL SHOPPING CENTRE 18 19

12 Investment Adviser s Report LAKESIDE LOCHSIDE WAY CHEADLE ROYAL BUSINESS PARK, MANCHESTER EDINBURGH Acquired in January 2016 for a consideration of 5.35 million reflecting an attractive net initial yield of 6.71% and an equivalent yield of 7.56%. The acquisition presents an opportunity to generate value through re-gearing the tenant leases and carrying out rent reviews from the currently very low base rents. Acquisition Price 5.4m Net Initial Yield at Acquisition 6.71% Equivalent Yield at Acquisition 7.56% Occupancy at % WAULT (including breaks) at years Acquired in July 2016 for a consideration of 4.45 million reflecting an attractive net initial yield of 8.44% and an equivalent yield of 7.79%. The acquisition presents an opportunity to generate value through re-gearing the tenant leases and carrying out rent reviews from the currently low base rents. Acquisition Price 4.5m Net Initial Yield at Acquisition 8.44% Equivalent Yield at Acquisition 7.79% Occupancy at % (including rental guarantees) WAULT (including breaks) at years ARTHUR HOUSE BURNSIDE MANCHESTER ABERDEEN Acquired in February 2016 for a consideration of million reflecting an attractive Acquisition Price 4.4m Burnside Industrial Estate, Aberdeen was acquired in August 2016 for a Acquisition Price 2.6m net initial yield of 4.87% and an equivalent yield of 7.75%. The acquisition presents an opportunity to generate value through re-gearing the tenant leases, carrying out rent reviews from the currently Net Initial Yield at Acquisition 4.87% Equivalent Yield at Acquisition 7.75% Occupancy at c50% consideration of 2.6 million reflecting an attractive net initial yield of 10.55% and an equivalent yield of 8.47%. The acquisition presents an opportunity to generate value through re-gearing the tenant Net Initial Yield at Acquisition 10.55% Equivalent Yield at Acquisition 8.47% Occupancy at % very low base rents and also extensively refurbishing the WAULT (including breaks) at years leases and carrying out rent reviews from the currently very WAULT (including breaks) at years office space to create an low base rents. Institutional product. OFFICE INDUSTRIAL RETAIL SHOPPING CENTRE 20 21

13 Investment Adviser s Report DULOCH PARK DUNFERMLINE GOSFORTH SHOPPING CENTRE GOSFORTH Duloch Park, Dunfermline was acquired in September 2015 for a consideration of million reflecting an attractive net initial yield of 7.39% and an equivalent yield of 7.2%. The acquisition presents an opportunity to generate value through re-gearing the tenant leases and carrying out rent reviews from the currently very low base rents. EASTERN AVENUE GLOUCESTER Acquired in February 2016 for a consideration of 5.3 million reflecting an attractive net initial yield of 8.41% and an equivalent yield of 7.16%. The property was acquired as it offered long income and strong tenants with the opportunity to carry out some asset management by working with the tenants to enhance the income and value. Acquisition Price 4.5m Net Initial Yield at Acquisition 7.39% Equivalent Yield at Acquisition 7.20% Occupancy at % WAULT (including breaks) at years Acquisition Price 5.3m Net Initial Yield at Acquisition 8.41% Equivalent Yield at Acquisition 7.16% Occupancy at % WAULT (including breaks) at years Acquired in October 2015 for a consideration of million reflecting an attractive net initial yield of 7.47% and an equivalent yield of 7.42%. The acquisition is at the core of DRIP S portfolio offering significant long term income secured to Sainsbury s with RPI uplifts along with the opportunity to enhance the value and income profile across the remaining tenants which include WH Smith, Boots, Lloyds Bank, Virgin Money and Costa Coffee. To date new leases have been agreed with WH Smith and Boots with new lettings to Naked Deli and Card Factory. Mall Income has also started with lettings to Costa Coffee and Amazon Lockers. OUTLOOK Acquisition Price 12.2m Net Initial Yield at Acquisition 7.47% Equivalent Yield at Acquisition 7.42% Occupancy at % WAULT (including breaks) at years While the investment market appears to have become more competitive, in large part this is being matched by a strengthening occupational market. This, combined with a dearth of modern vacant space, is leading to rental growth in most office and industrial markets with reducing vacancy rates on the High Street driving a return to rental growth in many retail centres. DREIM anticipate occupational demand, combined with a limited supply of new development, will drive further rental growth across regional markets, supporting the delivery of both sustainable income returns and capital value growth to our shareholders over the long-term OFFICE INDUSTRIAL RETAIL SHOPPING CENTRE 22 23

14 Principal Risks and Uncertainties There are a number of potential risks and uncertainties which could have a material impact on the Group s performance over the forthcoming financial year and could cause actual results to differ materially from expected and historical results. The Directors have carried out a robust assessment of the principal risks facing the Group, including those that would threaten the business model, future performance, solvency or liquidity. The table on the right outlines the key risk factors identified, but does not purport to be exhaustive as there may be additional risks that materialise over time that the Group has not yet identified or has deemed not likely to have a potentially material adverse effect on the business. RISK TYPE Strategic Investment portfolio Investment management RISKS Political; the impact of Brexit remains unclear and there are a number of European elections pending. Tenant default. Change in demand for space. Market pricing affecting value. Excess concentration in geographical location or sector. Lease expiries concentrated in a specific year. Decrease in occupancy. Poor investment decisions. Over exposure to a specific tenant, sector or geographic location Ineffective added value asset management of properties. MITIGATING FACTORS Well diversified regional property portfolio, with no exposure to London. Investment policy limits the Group s rent roll to no more than 20% to a single tenant. Focused on established business locations for investment. Active portfolio diversification between office, industrial and retail. Active management of lease expiry profile in forming acquisition decisions. Building specifications not tailored to one user. Experienced Investment Adviser. Agreed concentration limits reviewed quarterly by the Board and continuously by the Investment Adviser. Investment Adviser is experienced in active asset management and pro-active with regard to lease and development opportunities. Financial Reduced availability or increased cost of debt. Breach of borrowing covenants. New 3 year 25m revolving credit facility entered into in January Board has stated that it intends to target a gearing level of 40% and this gearing number at the point of drawdown is lower than that in the new facility covenants. New facility more than sufficient for spending plans. On-going monitoring and management of the forecast liquidity and covenant position. Operational Inadequate performance controls or systems operated by the Investment Adviser and Administrator. Ongoing review of performance by independent Board of Directors. Regulatory Adverse impact of new or revised legislation or regulations or by changes in the interpretation or enforcement of existing laws and regulations. Non-compliance with the REIT regime. External professional advisers are engaged to review and advise upon control environment and ensure regulatory compliance. REIT regime compliance is reviewed by external tax advisers and considered by the Board in assessing the Group s financial position and by the Manager in making operational decisions. APPROVAL OF STRATEGIC REPORT The Strategic Report incorporating the Chairman s Statement, Investment Adviser s Report and Principal Risks and Uncertainties was approved by the Board of Directors and signed on its behalf by: John Evans Chairman 26 January

15 Board of Directors Corporate Governance Statement The Board comprises three Directors, all of whom are non-executive and independent of the AIFM and the Investment Adviser. The Directors are responsible for the determination of the Group s investment policy and the overall supervision of the Group. The Directors are as follows: John Evans (Chairman) has worked in the investment management industry for over 30 years. He retired from Aberforth Partners, a specialist investment management firm, in 2011 having been one of its founding partners in He is also a director of Investors Capital Trust plc, the Securities Trust of Scotland plc and JP Morgan Mid Cap Investment Trust plc. Date of Appointment 26 March 2015 Hugh Little (Audit Committee Chairman) qualified as a chartered accountant in In 1986 he joined Aberdeen Asset Management and from 1990 to 2006 oversaw the growth of the private equity business before moving in to the corporate team as Head of Acquisitions. He has previously been a director of Aberdeen Development Capital PLC and Aberdeen Football Club plc. Date of Appointment 26 March 2015 Alan Robertson is a Fellow of the Royal Institution of Chartered Surveyors (FRICS) with over 30 years experience of working in the commercial real estate sector. He held posts as managing director of JLL in both Scotland and Turkey before taking up the post of CEO of JLL in the Middle East and North Africa region. Date of Appointment 26 March 2015 All Directors hold memberships in the Audit Committee, Investment Committee, Management Engagement Committee, and Nomination Committee. Mr Little is Chairman of the Audit Committee. Mr Evans is Chairman of the Investment, Management Engagement and Nomination Committees. CORPORATE GOVERNANCE The Board has considered the principles set out in the UK Corporate Governance Code (revised 2014), which can be found at org.uk, and the Association of Investment Companies Code of Corporate Governance (the AIC Code ) by reference to the AIC Corporate Governance Guide for Investment Companies (the AIC Guide ), both of which can be found at The Group is a member of the Association of Investment Companies. The UK Corporate Governance Code includes provisions relating to: the role of the chief executive; executive Directors remuneration; and the need for an internal audit function. For the reasons set out in the AIC Guide, and as explained in the UK Corporate Governance Code, the Board considers these provisions are not relevant to the position of the Group being an externally managed investment company. In particular, all of the Group s day-today management and administrative functions are outsourced to third parties. As a result, the Group has no executive Directors, employees or internal operations. The Group has therefore not reported further in respect of these provisions. Except for the above provisions, and the provision relating to the appointment of a Senior Independent Director discussed below, the Group complied throughout the period with the recommendations of the AIC Code and the relevant provisions of the UK Corporate Governance Code. INVESTMENT MANAGER/ INVESTMENT ADVISER R&H Fund Services (Jersey) Limited has been appointed by the Group, pursuant to the Investment Management Agreement, to be the Group s Alternative Investment Fund Manager ( AIFM or Investment Manager ), under which it is responsible for overall portfolio management and compliance with the Group s investment policy, ensuring compliance with the requirements of the Alternative Investment Fund Manager Directive ( AIFMD ) that apply to the Group, and undertaking all risk management. The AIFM has delegated the day-to-day management of the Group, pursuant to the Investment Managers Delegation Agreement, to Drum Real Estate Investment Management Limited ( DREIM or the Investment Adviser ). DREIM advises the Group on the acquisition of its investment portfolio and on the development, management and disposal of UK commercial assets in its portfolio. The Investment Adviser provides investment management and other services to the Group. Details of the arrangements between the Group and the Investment Adviser in respect of management services are provided on page 28. The Board keeps the appropriateness of the Investment Adviser s appointment under review. In doing so the Board reviews performance quarterly and considers the past investment performance of the Group and the capability and resources of the Investment Adviser to deliver satisfactory investment performance in the future. It also reviews the length of the notice period of the investment management agreement and the fees payable to the Investment Adviser, together with the standard of the other services provided. INDEPENDENCE The Board consists solely of nonexecutive Directors with John Evans as Chairman. All of the Directors are considered by the Board to be independent of the Alternative Investment Fund Manager ( AIFM or Investment Manager ). The Directors are required to submit themselves for re-election at least every three years. In addition the Board has agreed that any Director with more than nine years service will be required to stand for re-election at each annual general meeting. New Directors will receive an induction from the Investment Adviser and the Administrator on joining the Board, and all Directors will receive other relevant training as necessary

16 Corporate Governance Statement OPERATIONAL STRUCTURE - The basis on which the Group aims to generate value over the longer term is set out in its investment objective and investment policy as contained on pages 30 and 31. A management agreement between the Group and the Investment Adviser sets out the matters over which the Adviser has authority and the limits beyond which Board approval must be sought. All other matters, including investment and dividend policies, corporate strategy, gearing, corporate governance procedures and risk management, are reserved for the approval of the Board of Directors. The Board meets regularly and receives full information on the Group s investment performance, assets, liabilities and other relevant information in advance of Board meetings. Details of loan covenants are included in Note 13 to the Consolidated Financial Statements. SENIOR INDEPENDENT DIRECTOR In view of its non-executive nature, and the requirement of the Articles that all Directors retire periodically at least every three years, the Board considers that it is not appropriate for a senior independent Director to be appointed. The AIC code notes that whilst there may be some advantages in the concept of investment companies nominating a separate senior independent Director, it may be appropriate for the chairman of the Audit Committee to fulfil this role. REMUNERATION OF DIRECTORS The Group does not have a separate remuneration committee as the Board as a whole fulfils the function of a remuneration committee. BOARD AND DIRECTORS PERFORMANCE APPRAISAL The performance of the Board, committees and individual Directors is evaluated through an assessment process conducted by the Nomination Committee and led by the Chairman. This process involves the completion of questionnaires tailored to suit the nature of the Group, discussions with individual Directors and individual feedback from the Chairman to each of the Directors. The evaluation of the Chairman is led by the Chairman of the Audit Committee. The Board has established four committees: Audit, Investment, Management Engagement and Nomination. Each of the committees has written terms of reference which are reviewed at least annually and clearly define their responsibilities and duties. The terms of reference for these committees are available on request. THE AUDIT COMMITTEE Hugh Little is the Chairman of the Audit Committee which comprises the full Board. In discharging its responsibilities the Committee reviews the Interim and annual Financial Statements, the system of internal controls, and the terms of appointment and remuneration of the auditor. It is also the forum through which the auditor reports to the Board. The Audit Committee is expected to meet at least twice a year. The objectivity of the auditor will be reviewed by the Committee, which will also review the terms under which the external auditor is appointed to perform non-audit services. The Committee will review the scope and results of the audit, its cost effectiveness and the independence and objectivity of the auditor, with particular regard to non-audit fees. THE INVESTMENT COMMITTEE John Evans is the Chairman of the Investment Committee which comprises the full Board. The Investment Committee is responsible for authorising all purchases and sales within the Group s portfolio. The meetings are convened as investment opportunities arise and therefore frequency may fluctuate. THE MANAGEMENT ENGAGEMENT COMMITTEE John Evans is the Chairman of the Management Engagement Committee which comprises the full Board. The Committee reviews the appropriateness of the continuing appointment of the Investment Adviser and other key service providers, together with the terms and conditions thereof, on a regular basis. THE NOMINATION COMMITTEE John Evans is the Chairman of the Nomination Committee which comprises the full Board. The Nomination Committee is responsible for conducting the annual evaluation process and for considering the composition of and succession plans for the Board. APPOINTMENTS, DIVERSITY AND SUCCESSION PLANNING All new appointments by the Board are subject to election by shareholders at the AGM following their appointment. The Group s Articles of Association require all Directors to retire at least every three years. The Board believes in the benefits of having a diverse range of skills and backgrounds, and the need to have a balance of experience, independence, diversity, including gender, and knowledge on its Board of Directors. All appointments will continue to be based on merit and therefore the Board is unwilling to commit to numerical diversity targets. Attendance at the scheduled meetings throughout the period has been as below: Board Audit Committee Management Engagement and Nomination Committees Held Attended Held Attended Held Attended John Evans Hugh Little Alan Robertson In addition to these scheduled Board needs to consider whether it reports, from the Investment Adviser meetings, there were a further is appropriate to adopt the going and from the Corporate Broker, 14 Board and Board Committee concern basis of accounting in on the views of shareholders, and meetings during the period to preparing the Financial Statements. the Chairman and other Directors deal with other matters, including The Board continues to adopt make themselves available to meet meetings of the Investment the going concern basis and the shareholders, when required, to Committee. Given the recent detailed consideration is contained discuss any significant issues that establishment of the Group no on page 58. The viability statement, have arisen and address shareholder meetings of the Management under which the Directors assess concerns and queries. Engagement and Nomination the prospects of the Group and Committees were held in the period, the Group over a longer period, is By order of the Board but both Committees met between contained on page 35. the period end and the signing of the R&H Fund Services Limited Financial Statements. RELATIONS WITH SHAREHOLDERS Company Secretary The Group seeks the views of its 26 January 2017 GOING CONCERN shareholders and places great Under Provision C.1.3 of the UK importance on communication with Corporate Governance Code, the them. The Board receives regular 28 29

17 Directors Report The Directors present their report and audited Financial Statements of the Group for the eighteen months ended 30 September The Corporate Governance Statement on pages 27 to 29 forms part of their report. The Group s Strategic Report can be found on pages 2 to 25. RESULTS AND DIVIDENDS The results for the period are set out in the attached Financial Statements. It is the policy of the Directors to declare and pay dividends as quarterly interim dividends. The Directors do not therefore recommend a final dividend. DIVIDEND POLICY Subject to market conditions and performance, financial position and financial outlook, it is the Directors intention to pay an attractive level of dividend income to shareholders on a quarterly basis. Whilst not forming part of the Company s dividend policy, the Board is targeting fully covered aggregate quarterly dividends of at least 5.5p per share in respect of the year ended 30 September 2017 and at least 6.0p per share in respect of the year ending 30 September PRINCIPAL ACTIVITIES AND STATUS Drum Income Plus REIT plc (the Company) is registered as a public limited company in terms of the Companies Act 2006 (number: ). It is an investment company as defined by Section 833 of the Companies Act The interim dividends paid during the period were as follows: Payment date Rate per share First interim dividend 26 February p Second interim dividend 27 May p Third interim dividend 26 August p A further interim dividend of pence per share, was paid on 2 December The Company and its subsidiary Drum Income Plus Limited (together the Group ) is a closed ended property investment group which was launched in May The INVESTMENT POLICY The Group pursues its investment objective by investing in a diversified portfolio of UK commercial properties. Company has a single class of ordinary shares in issue, which are listed on the premium segment of the Official List and traded on the London Stock Exchange s Main Market. The Group has, subsequent to its launch, entered the Real Estate The Group invests principally in three commercial property sectors: office, retail (including retail warehouses) and industrial, without regard to a traditional property market relative return benchmark. Investment Trust (REIT) regime for the purposes of UK taxation. The Group invests predominantly in income producing investments. The Company is a member of the Association of Investment Companies (AIC). Investment decisions are based on analysis of, inter alia, prospects for future income and capital growth, sector and geographic prospects, SUBSIDIARY COMPANY The Company has a 100% interest in Drum Income Plus Limited number: , a property investment tenant covenant strength, lease length, initial and equivalent yields and the potential for active asset management of the property. company, details of which are set out in Note 10 to the Consolidated Financial Statements. The Group does not invest in other investment companies or funds. However, the Group may hold INVESTMENT OBJECTIVE The Group s investment objective is to provide investors with a regular dividend income with the prospect of income and capital growth over the longer term. property through special purpose vehicles and is permitted to invest up to 25% of total assets, at the time of investment, in joint ventures which hold real estate directly. The Group is also permitted to forward fund purchases of properties on a pre-let or a non-pre-let basis and obtain options over properties. Investment risk is spread through investing in a range of geographical areas and sectors, and through letting properties, where possible, to low risk tenants. Although the Group has not set any maximum geographic exposure or maximum weightings in any of the three principal property sectors, it may invest no more than 25% of total assets, at the time of investment, in other sectors such as leisure, residential, student residential, healthcare and hotels. Once the Group is fully invested (including drawdown of available debt facilities), no single property may exceed 20% of total assets at the time of investment. Speculative development (i.e. properties under construction which have not been pre-let) is restricted to a maximum of 10% of total assets at the time of investment or commencement of the development. Development, other than speculative development, is also restricted to a maximum of 10% of total assets at the time of investment or commencement of the development. Once the Group is fully invested (including drawdown of available debt facilities), the Group is not permitted to acquire an investment if, as a result, income receivable from any one tenant, or from tenants within the same group (other than from central or local government), would in any one financial period exceed 20% of the total rental income of the Group for that financial period. The Group is permitted to invest cash held for working capital purposes and awaiting investment in cash deposits, gilts and money market funds. The Board intends that gearing, calculated as borrowings as a percentage of the Group s gross assets, will not exceed 50% at the time of drawdown. The Board has stated that it intends to target a gearing level of 40%. Any material change to the investment policy requires the prior approval of shareholders. RISK MANAGEMENT Under provision C.2.1 of the UK Corporate Governance Code Directors of listed companies are required to confirm in the annual report that they have performed a robust assessment of the principal risks facing the Group, including those that would threaten its business model, future performance, solvency or liquidity. The principal risks and uncertainties, together with mitigating factors are disclosed on pages 24 to 25. The Group s risk register is the core element of the risk management process. The register is prepared, in conjunction with the Board, by the Administrator, Company Secretary, Investment Adviser and Investment Manager. The Audit Committee review and challenge the register, assessing the likelihood of each risk, the impact on the Group and the strength of controls operating over each risk. FINANCIAL RISK MANAGEMENT Details of the financial risk management objectives and policies followed by the Directors can be found on pages 70 to 73. KEY PERFORMANCE INDICATORS The Board uses a number of performance measures to assess success in meeting objectives. The key performance indicators are as follows: Dividend per share; Earnings per share; Net Asset Value ( NAV ) per share; and Premium/discount at which the Company s shares trade to NAV. The Group s key performance indicators were chosen in light of its investment objective. The Group s performance against the key performance indicators for the period under review is reported on pages 6 and 7 and in the Financial Statements

18 Directors Report INVESTMENT ADVISER Drum Real Estate Investment Management Limited manages the Group s investment portfolio. The Board keeps the appropriateness of the Investment Adviser s appointment under review. In doing so the Board reviews performance and considers the past investment performance of the Group and the capability and resources of the Investment Adviser to deliver satisfactory investment performance. It also considers the length of the notice period of the investment management contract and the fees payable to the Investment Adviser, together with the standard of the other services provided. The Board is satisfied with the Investment Adviser s ability to deliver satisfactory investment performance and with the quality of the other services provided. It is therefore its opinion that the continuing appointment of the Investment Adviser is in the best interest of shareholders as a whole. Details of the terms of the Investment Adviser s appointment are contained in note 17 on page 69. FUTURE DEVELOPMENTS The likely future developments of the Company are contained in the Strategic Report on pages 2 to 25. DIRECTORS Biographical details of the Directors, all of whom are non-executive, can be found on page 26. The Directors believe that the Board has an appropriate balance of skills, experience, independence and knowledge to enable it to provide As explained in the Corporate Governance Statement on pages 27 to 29, the Board has agreed that the Directors will retire periodically in order to meet the requirements of the Articles of Association that each Director be re-elected at least every three years. The Board has concluded that it is more appropriate, both for the Group and shareholders, to move towards a staggered rotation of elections with at least one Director standing for re-election at each Annual General Meeting. Accordingly, John Evans will retire at the Annual General Meeting and, being eligible, effective strategic leadership and proper guidance to the Group. The Board confirms that, following the evaluation process set out in the Corporate Governance Statement on page 28, the performance of each of the Directors continues to be effective and demonstrates commitment to the role. The Board therefore believes that it is in the interests of shareholders that John Evans, who retires at this Annual General Meeeting subject to re-election in accordance with the Board s policy on periodic retirements, is re-elected. offers himself for re-election. SUBSTANTIAL INTERESTS IN SHARE CAPITAL As at 30 September 2016, the Company had received notification of the following holdings of voting rights (under the Financial Conduct Authority s Disclosure, Guidance and Transparency Rules): 30 September 2016 Number of Ordinary Shares held Percentage held* Funds under the management of Tcam Asset Management Ltd 29,526, % Drum REIT LLP 2,000, % * Based on 36,594,900 shares in issue as at 30 September These shares are held on behalf of the underlying beneficial shareholders. There have been no changes notified to the Company in respect of the above holdings, and no new holdings notified, since the period end. DIRECTORS DEEDS OF INDEMNITY The Group has entered into deeds of indemnity in favour of each of the Directors. The deeds of indemnity give each Director the benefit of an indemnity, out of the assets and profits of the Group, to the extent permitted by the Companies Act 2006 and subject to certain limitations against liabilities incurred by each of them in the execution of their duties and exercise of the powers as Directors of the Group. A copy of each deed of indemnity is available for inspection at the Group s registered office during normal business hours and will be available for inspection at the Annual General Meeting. CONFLICTS OF INTEREST Under the Companies Act 2006 a Director must avoid a situation where he or she has, or could have, a direct or indirect interest that conflicts, or possibly may conflict, with the Group s interests. The requirement is very broad and could apply, for example, if a Director becomes a director of another company or a trustee of another organisation. The Companies Act 2006 allows directors of public companies to authorise conflicts and potential conflicts, where appropriate, where the Articles of Association contain a provision to this effect. The Company s Articles of Association give the Directors OTHER COMPANIES ACT 2006 DISCLOSURES - The Company s equity capital Meeting after the Annual General structure consists wholly of Meeting at which last elected. Ordinary Shares. Details of the share capital, including voting - Amendment of the Articles rights, are set out in Note 16 of Association and powers to to the Financial Statements. issue and buy back shares require shareholder authority. - Details of the substantial shareholders in the Company are - There are no significant listed above. restrictions concerning the transfer of securities - The rules for appointment in the Company (other and replacement of Directors than certain restrictions imposed are contained in the Articles by laws and regulations such of Association of the Company. as insider trading laws); no In respect of periodic retirement, agreements known to the the Articles of Association provide Company concerning restrictions that each Director is required to on the transfer of securities in the retire at the third Annual General Company or on voting rights; authority to approve such situations. The Group maintains a register of Directors conflicts of interest which have been disclosed and approved by the other Directors. This register is kept up-to-date and the Directors are required to disclose to the Company Secretary any changes to conflicts or any potential new conflicts. and no special rights with regard to control attached to securities. Pursuant to the Company s loan facility, mandatory prepayment may be required in the event of a change of control of the Company; there are no other significant agreements which the Group is a party to that might be affected by a change of control of the Company following a takeover bid. - There are no agreements between the Group and the Directors providing for compensation for loss of office that occurs because of a takeover bid